Radical changes in opportunities to invest in venture capital (VC) are emerging via the EU, including in Brussels, where the European Parliament is now vetting a draft Regulation on European Venture Capital Funds. The package aims to make it easier for VC funds to raise capital from across the EU.
The Commission, which announced a proposal in December 2011, hopes that the new regulation will achieve a swift passage and be in force by the end of 2012. The package runs parallel with another proposed regulation on European Social Entrepreneurship Funds, which makes mention of VC. Rapporteur in the European Parliament for the VC Regulation is Philippe Lamberts, a Belgian Green Party MEP.
The Commission's initiative follows various pressures, including a protest letter dated August 2011 from BusinessEurope. The employer organisation asked for the creation of a passport to allow investment mangers to raise venture capital across the EU.
At present, European venture capital activity is "fragmented and dispersed", according to an explanatory memorandum in the subsequent legal wording. Most member states lack specific legislation, the Commission states. As a result, potential investors, including pension funds, are reluctant to allocate funds to VC.
The memorandum continues that while the US, from 2003-10, channelled approximately €131bn into VC funds, the EU figure was only €28bn. Potential investors continue to prefer private equity over venture capital investments.
Even so, EU pension funds have significantly moved out of VC investments in the 10 years since since the dot-com collapse, although there has been some recovery recently. VC investment, which was only 5% of the total in 2007, had risen to 11 % in 2011. During the same period, insurance companies reduced their proportion from 4% to just 1%.
Overall, according to Matthias Ummenhofer, head of VC at the Luxembourg-based European Investment Fund (EIF), VC's contribution to EU economic growth has fallen by a quarter in the past 10 years to around €3.1bn now. The EIF welcomes the Commission's new regulation. The main shareholders of the EIF, which was founded in 1994, are the European Investment Bank (EIB) and the European Commission.
In another step forward, the Commission has relaxed provisions in the Alternative Investment Managers' Fund Directive (AIFMD), reducing the fund threshold to under €500m. This will enable VC funds to escape otherwise onerous costs. The AIFMD is due for implementation into EU national rulebooks by the end of 2013.
The European Venture Capital Association (EVCA) notes that the lower threshold means VC funds no longer have automatic access to a pan-European fund raising passport. Furthermore, they may not now have credibility with investors, such as pension funds, although an alternative passport will come with the new regulation.
James Burnham, the EVCA's head of external affairs, notes that in March 2010, the EVCA proposed a scheme to use public sector capital to attract private sector investors into funds of funds. Now EVCA members and the European Commission working to develop this concept.
Burnham refers to the Vico Report, a European Commission initiative, which finds that VC investors have disproportionally positive effects on employment generation and asset accumulation within the economy.
With this in mind, government agencies sourced 16% of VC funding in 2008, a figure which rose, considerably, to 39% in 2011. The report continues that in the UK, VC is the most successful in Europe.
However, against enthusiasm by some national government, the EVCA castigates some mainstream financial regulation output from Brussels. It cites, as a "many headed hydra biting" the VC sector, "challenges" resulting from Solvency II, CRD IV, and IORP II.